After Cyprus, New Tolls For The Euro

After the attempted tolls on bank savings in Cyprus for saving the Euro, a new kind of tolls can be heard in the distance for the currency. The fundamental trust in the currency as a store of value has been broken, according to multiple signs across Europe. Even with the Cypriot parliament backpedaling frantically, the situation appears snowballing – there could be a bank run in two weeks.

When I was speaking at the first European Bitcoin conference in Prague, another speaker was a seasoned economist whose name I forget. He described how today’s bank system with so-called fractional reserve banking is essentially a crumbling Ponzi scheme. In summary, banks have the right to conjure up money out of thin air and lend that money to you against interest that they get to keep. (Yes, really, that’s actually how it works today, although it is admittedly a very simplified description.) As part of the Q&A, I asked him what the first sign of a collapse scenario materializing would be.

He responded that a first sign of collapse would be that people didn’t trust their holdings in the currency to retain their value, so they would actively seek to trade it off for other stores of value – other currencies or just about anything else. This was an answer that made sense in the light of the history of known hyperinflations and currency collapses.

In the past days with the Cypriot bailout measure, these first signs of a currency collapse scenario have materialized. People are now actively seeking to trade off their Euros, no longer trusting them as a store of value. When this has happened in the past to currencies, they have not survived.

This was visible on first on Cyprus, where people made a so-called run on the bank to get their money in cash to save it from the negotiated 6-10% “save-the-Euro” toll from all bank accounts, except the banks were closed, so it became a run on ATMs which predictably drained of cash in a heartbeat (and deliberately were not refilled).

A “run on the bank” means that people no longer trust the banks to hold their savings, so everybody tries to withdraw their money at the same time – something that no current bank survives, as the customers’ money isn’t in the bank vaults. This is a scenario that can develop in hours in any economy, when some people start withdrawing in a sign of distrust and more people follow suit to not be the one left standing when the music stops.

The tremors of the bank run – or the attempted bank run, thwarted only by a bank holiday – were felt far and wide across the entire Eurozone. People in several countries got the message loud and clear: it’s their savings, their retirement money, that may be next up for a shave.

One obvious alternative store of value is Bitcoin, which is gaining in popularity. Over the weekend, Bitcoin apps soared in popularity in Spain. That is no coincidence; Spain is one of the plummeting countries badly in need of a parachute.

Unsurprisingly, Bitcoin has not just soared in interest, but also in value the past days to meet increasing demand as people flee the Euro – it has climbed almost 50% in value since news broke of the Cypriot bank account toll a few days ago, topping 65 USD per bitcoin today, up from the 40s a week ago. (Those who hold their savings in bitcoin, which is unseizable, would not be affected by a bank account toll.)

Another such country is Italy, a country in a thorough financial mess. A few days ago, one German banking chief suggested that all Italian savings need a 15% one-time toll per the Cypriot model to save Italy’s economy. Guess what happens next.

So what brought us to this situation? Two things.

The first thing was the process of introducing the Euro, the common currency, which was an ivory tower project from the get-go. Europe’s political leaders had simply decided to create a prestige project of a common currency of the world’s largest economy, the European Union. In making this happen, any criticism that could suggest weaknesses in the idea were simply not allowed to percolate up to the decision-makers.

The second thing is the insane idea that bank profits are privatized and bank losses are socialized – meaning that bank owners get to pocket any profits, and taxpayers get to cover any losses that banks make. This is a recipe for disaster that needs to stop yesterday. There is simply no reason at all to treat banks differently from any other company. Yes, they keep the economy going – which is all the more reason to subject them to the rules of the economy, namely that when you risk money, you risk your own money and not the taxpayers’ money.

When banks started failing, governments unwisely stepped in and covered their losses. In this move, insolvent banks became insolvent governments while bank owners walked away. Tax payers have been footing the bill – and now, it appears to be the turn of the small savers.

The Euro is gone; bells are tolling its demise in the distant background. When the highest politicians in a Eurozone country told its people that the Euro is not trustable as a store of value, that was the point of no return. It won’t be here in a couple of years, at least not in its current form. The only conceivable way out I see that would allow the Eurocrats to keep some form of professional honor is to divide the Euro into two or more subcurrencies while it can still be done in some kind of order.

But such a move would require Eurocrats to admit that a failed policy could be caused by bad fundamentals, rather than insufficient effort (aka the “if it’s not working, you’re just not trying hard enough” mentality). Don’t hold your breath.

(End note: it could be argued that the problem isn’t with the Euro as such but with bank solvency, as the currency as such doesn’t look threatened on the surface – after all, people who manage to withdraw their savings into cash, still denominated in Euro, aren’t threatened; it’s having money in a bank that’s bad. However, in reality, that isn’t really an option, and the reason we’re in this situation in the first place is because the economies have been locked together in a common currency in a most unhealthy way.)

Rick Falkvinge

Rick is the founder of the first Pirate Party and a low-altitude motorcycle pilot. He works as Head of Privacy at the no-log VPN provider Private Internet Access; with his other 40 hours, he's developing an enterprise grade bitcoin wallet and HR system for activism.

Discussion

“The National Government are pushing a Cyprus-style solution to bank failure in New Zealand which will see small depositors lose some of their savings to fund big bank bailouts, the Green Party said today.”

And when the euro has crashed, european political leaders will wake up and notice that Russia after 250 years has reached the geopolitical goal set by Catarina the Great: Russian precense in the Meditarians.

Per "wertigon" Ekström

March 20, 2013

Could happen, but I don’t think that it will happen easily.

First off, Russia must get past one of it’s major historical enemies, namely, Turkey. For that to happen through warfare, well, I just don’t see it happen, and any other way would put the balls of the bear in Turkey’s hand.

Having a Russian colony in the mediterranean, maybe occupying a former Yugoslavian state, is also a distinct possibility, but since Russia would have no apparent means of getting there without violating one airspace or another, well…

Therefore, any presence Russia can establish in the mediterranean will be easy to cut off. So I just don’t see that as especially threatening right now. If Russia were to invade and hold Turkey, however…

Anonymous

March 21, 2013

considering the importance Turkey has in relation to Russia, could that be the reason the USA is trying to bring Turkey into the TAFTA negotiations? as soon as i read that the USA wanted Turkey on board, and knowing that the USA doesn’t do a damn thing unless it is going to be advantageous to it (just look at how it has blackmailed and threatened other countries over copyright laws, just to protect Hollywood etc!) i started to wonder what that reason could be. you may have hit it on the head!

I don’t get the drama. Cyprus has gigantic bank accounts compared to its national economy and 1 Mio citizens. Cyprus needs a bailout for its banking sector or the banks go bust.

The European Treaties forbid bailouts. cypriots turn to euro leaders, make an agreement, then tell they want to renegotiate and the others, say fine, we are done with you, return in March. They return in March, get 10 Bn from the European partners and are asked to raise 7bn on their own, by a haircut of the bailed out accounts. In other words, the account owners pay part of the bailout themselves. A kind of cold devaluation as opposed to inflation. Instead of leaving the low income savings, the Cypriot communist government includes them, Cypriot politicians blame that on the foreign aiders (which agreed to hand them 10bn) and reject the bailout. So what happens now? A bank run is underway. The Russians or other nations may jump in but under far worse conditions than from the eurozone nations. If Cyprus will collapses they will again blame that on other nations but it was their own political decision and stupidity.

A bank run or Cyprus state bankruptcy does not mean anything for the eurozone or the Eurocurrency. Cyprus is not systemically relevant for the EU. I’d say let them get bankrupt, then care for the citizens of Cyprus and burn the Cyprus politicians responsible at the stake. A cyprus state needs to be build from the bottom up, with a Kantian rational rule, not crazy Cypriot communists and their dirty mafia money.

Actually, many countries (almost all EU) “need a bailout for their banking sector or the banks go bust”.
But every other country got some kind of support, Cyprus didn’t YET.

European Treaties are not honored by anyone, starting with France and Germany who violated the 3% rule and
violated the Stability Pact on purpose in 2003 with no consequences.
Now the law is what benefits the strongest.

The agreement Cyprus made in eurogroup on March 14 was:
You have to commit suicide OR we’ll kill you. These were the two options.

Cyprus did not get 10bn they got a promise for 10bn IF THEY AGREED to destroy their banking sector (providing 25% of their GDP),
which yes is huge, but there are other Euro countries such as Luxemburg with huge banking sector, that nobody cares for,
actually they praise them.
(that’s why the Luxembourgians now tell publicly the Germans to stop talking about huge banking sectors).

The gov. in Cyprus is not communist anymore, it’s right-wing coalition and pro-Merkel(!).

I could continue forever but there’s massive misinformation going on, so please everyone try to find more sources, for better information.

What I fear is that bitcoiners “think” that Bitcoin is a new store of value for the very rich and are thus artificially creating the value. It might still be a bubble.

Datavetaren

March 21, 2013

Currently, Bitcoin _is_ a bubble. Capital is poured into the system by speculators (myself included) and perhaps by frightened bank account holders in the crumbling Eurozone. However, Bitcoin will get intrinsic value when there’s real trade and economy for that system itself. I’m currently spending a lot of energy (late nights) on building a new business around Bitcoin which will eventually contribute with some intrinsic value. Trust me, this is going to change the world as we know it. I have a fantastic idea that will put some real spin on this new currency and what it can be used for.

Dondilly

March 21, 2013

The other flaw in the euro as with all western currencies is that it is debt based. All money issued by the Central Bank is borrowed into existence. This means that the currency at some point in the future will fail, it is a mathematical certainty as the money has to be paid back with interest, the loan plus interest is always greater that the total currency in circulation. The banks then expand the money supply yet further, using that money as collateral to lend against. The problems are twofold. As loans are paid off, be they personal or public debts, the money supply shrinks. The real problem is that paying back to the central bank removes collateral, so inflation is built into the system to as very least pay the interest, that is until the levels of interest eventually become unmanageable. That is the danger of fiat currencies. As for the euro, trying to grab from people’s accounts is the deathnell for the currency.

That’s not the danger of fiat, that’s the danger of usury. There’s nothing stopping a fractional-reserve Bitcoin bank from coming into existence other than people refusing its legitimacy.

You can back a currency with gold, with cryptography, or with a handshake, but people are going to start needing loans no matter what. When those loans demand interest, that’s when the death spiral of unsustainable growth begins. There’s a reason why every major world religion viewed interest as a sin: because it breaks things.

anon coward

March 22, 2013

Bitcoins themselves aren’t debt based and nobody can print bitcoins to bail out the banks. At the same time anyone can be a bank and you don’t even have to use a bank. Nobody in their right mind would accept bank issued debt IOUs as settlement/assets instead of bitcoins as they already are as convenient as money gets. If they did it’s not bitcoins that are at fault but the emergence of another fiat money (the IOUS) issued by a bank subject to printing and manipulation to their hearts content. And then you have the USD/EUR problem all over again. The number in your account isn’t real unless it’s backed up by the bitcoin blockchain. So it’s the debt based Fiat money that breaks the whole system and it doesn’t matter if they are actually in circulation or just an “accounting” number in a bank computer.

Slacker

August 16, 2013

One thing that makes it hard for a fractional-reserve Bitcoin bank to emerge is the publicness of the block chain. It is easy to see how much money is backing your bank – and if it starts to get too aggressive with lending, people will notice and make a bank run much earlier than with a traditional “we have gold, trust us” bank. The earlier a dodgy bank is steamrolled by a run, the less painful it is (and the less inflation and dodgy profits for its’ owners can it cause before it crashes).

Peter Andersson

March 21, 2013

Let’s say Bitcoin really is Money 2.0 and that it’s better than the old Money 1.0-1.xx. Obviously those hard stuck with enough Money 1.0 will have mass incentive to stop Money 2.0 from becoming the new thing. And Money 3.0 has not yet been invented – but there’s no saying it won’t be tomorrow. Then if enough people shift to Money 2.0 so does the mass incentive to stop the next, next thing (Money 3.0) from being invented and/or coming into use. Hence all we get is a new ruling “class” with the same incentive to protect themselves from new inventions.

To quote The Who: Meet the new boss, same as the old boss…

Do you really wanna be on that side Rick?

Datavetaren

March 21, 2013

Inventing a new currency is far from easy. One of the main problems is to get the new currency into circulation. Bitcoin is an ingenious construct that makes this process as fair as it can be, despite the claim that some people think that early adopters are going to be incredibly wealthy. Once you’ve gained trust to a system (Money 2.0), any new money (Money 3.0) has to be far more superior for people to make the shift.

That´s a very criticial point of view, but in essence i agree. There are 2 fronts clashing here. I also think that one has to consider an influence from outside the EU, from the US. The Euro is still a strong currency and the markets are dominated by speculations, that´s sad.

The US was very intelligent and now the EU has the financial problems, which existed already in the EU countries before the crysis came up.

Also telling the people to handle money carefully and then playing with it like children, that´s my view on bankers and politicians, liars.

K

March 21, 2013

This is the new great game, financial bubbles are created by design. The moneyed interests are no longer interested in creating bubbles in single industries, their targets are bigger, the aim now is the countrys we live in and the money we saved for our children and pensions.

Datavetaren

March 22, 2013

@Falkvinge: Why does the home page of your site (https://falkvinge.net) end up blank in Google Chrome? (Works fine in IE8). It’s only the home page (not the actual articles, if you copy&paste the link.)

Is it safe to try bitcoin? I don’t mean safe as in safety of the money, but my safety. Or will governments crack down on it with reference to some law that just about nobody knew existed, and heavily fine or even jail people who are experimenting with Bitcoin?

TG

March 22, 2013

I guess people could get nailed for tax evasion for trading things with Bitcoin and not declaring it, but more generally, I’m not sure what laws governments can pass against running a p2p cryptographic system on one’s computer.. And even if they did pass laws against Bitcoin, I don’t see how they would be any more enforcible than the current laws against “piracy”.

We already know from an ECB report that they are worried about Bitcoin affecting their ability to “conduct monetary policy”, and so they should be.

“The Euro is gone”
Oh really? From where I’m standing, it seems like it’s being used by hundreds of millions of people every day. I think your definition of “gone” seems to be differing from what is common practice.

“It won’t be here in a couple of years”
Feels like I’ve heard this before. Oh yeah! It was by euroskeptics a couple of years ago. It hasn’t come true, all countries who used the euro back then are still using it, but you keep postponing the doomsday date like a baptist minister.

Bitcoin has just saved my business when Eurogroup ordered Cyprus government to expropriate every penny above 100K EUR on every bank account in the country.

Fortunately, in the beginning of 2012, as a little experiment, I made an investment in bitcoins. At this moment its price has risen as much as thirtyfold! Yes, I lost over 700K on my Cyprus account but thanks God i still have bitcoins and my losses almost covered and I continue running my business.

Cyprus bailout was really a lesson to me. My trust in banks has fallen to zero.

Just read my sad story and make your own conclusion about the reliability of current banking system:

Bitcoin has just saved my business when Eurogroup ordered Cyprus government to expropriate every penny above 100K EUR on every bank account in the country.

Fortunately, in the beginning of 2012, as a little experiment, I made an investment in bitcoins. At this moment its price has risen as much as thirtyfold! Yes, I lost over 700K on my Cyprus account but thanks God i still have bitcoins and my losses almost covered and I continue running my business.

Cyprus bailout was really a lesson to me. My trust in banks has fallen to zero.

Just read my sad story and make your own conclusion about the reliability of current banking system:

[…] been really interested in the growth of BitCoin these last few weeks as the news of the Cyprus crises unfolded, and the price of BitCoin has jumped from $70 odd dollars to the princely sum of $90 over […]

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